Somebody forgot to tell wealth-management stocks that our sharemarket is struggling. Magellan Financial Group, Henderson Group PLC and BT Investment Management have soared this year, despite volatility in global equities. So is it too late to buy the sector?
Value is harder to find. Magellan Financial Group has a one-year total return (including dividends) of 66%. Henderson has delivered 57% and BT Investment Management has returned 85%!
Sector doyen Platinum Asset Management looks tame by comparison with an 18% total return over one year. IOOF Holdings and the recovering Perpetual round out the field with a 10% and minus 2% return respectively.
Then there is Challenger. It focuses on annuities and retirement-income products and has a funds-management business that provides administration and distribution services to boutique managers. Challenger’s one-year return is almost 35%.
The collective performance of wealth management stocks is exceptional in an Australian share market that has gone backwards over 12 months. The S&P ASX 200 Accumulation Index has shed 3.4% over one year, Standard & Poor’s data shows. Compared to the big banks, which have mostly delivered negative total returns over 12 months, the wealth managers have starred.
They have benefited from strong funds inflow, rising interest in global equities funds, product-distribution gains offshore and the lower Australian dollar. The sustained outperformance of several wealth manager against their benchmark index – a key metric to judge these stocks – has also buoyed the sector. Australia is blessed with some fantastic global-equities managers, whose funds consistently beat the market return.
That’s the good news. The bad news is valuation. Magellan and BT trade on a forecast Price Earnings (PE) multiple of almost 22 times, consensus analyst estimates show. Platinum trades on 19 times, Henderson and Perpetual are about 17 times, and IOOF is 15 times.
Magellan and BT have significant short-term momentum and good long-term growth prospects as they expand overseas. Magellan deserves a valuation premium because it continues to launch successful products and build its US distribution. BT will benefit from ongoing growth in its offshore subsidiary, JO Hambro Capital Management, and the lower Australian dollar. But both stocks look fully valued for now and best bought at lower prices.
Other wealth managers have strategic appeal. The Super Switzer Report has identified Challenger and IOOF Holdings in its takeover portfolio. However, they provide different types of exposures to most wealth-management stocks so are not directly comparable to BT, Platinum and Magellan. The same could be said of Perpetual, given its expanding private wealth-management business and the Perpetual Corporate Trust.
Here are three favoured wealth-management stocks at current prices:
1. Henderson Group
The UK-based fund manager has rallied from $1.50 in June 2013 to $6.18, becoming one of the market’s star mid-cap stocks. Dual-listed on ASX and the London Stock Exchange, Henderson had £82.1 billion in asset under management in the first half of FY2015.
Consistently strong fund outperformance is attracting new money, and triggering performance-based fees that drive higher earnings growth. Henderson said in September that 83% of its funds had outperformed their benchmark index over three years – an excellent result given most active fund managers underperform their index over long periods. Henderson is especially strong in European and global equities and alternative asset classes.
Moreover, Henderson has consistently outperformed across a range of asset classes, in different geographies. Investors have responded by pouring more money into its funds – quarter-on-quarter growth in funds inflow has been ahead of Henderson’s forecasts.
Henderson is not cheap. But it trades in line with its closest UK peers, according to Macquarie Equities Research, and still at a significant discount to Magellan, Platinum and BT, its nearest Australian peers. Also, Henderson provides leverage to a lower Australian dollar, given its offshore earnings.
Seven of 10 brokers that cover Henderson have a buy recommendation, consensus estimates show. A median target price (in Australian dollars) of $6.61 suggests Henderson is slightly undervalued at recent trades around $6.20. It has the operational momentum of Magellan and BT – if perhaps not the same long-term growth prospects – at a more attractive valuation.
Henderson
Source: Yahoo!7 Finance 12 November 2015 (based on ASX listing)
2. Platinum Asset Management
It wasn’t so long ago that Platinum was the automatic choice for global equities exposure, such as was its investment performance and reputation. But a period of underperformance from its International Fund has weighed on the stock, relative to its peers.
Platinum fell from $9.15 in early 2015 to $7.57, although it is still well up over two years. Average funds under management of $26.1 billion at June 2015 compared to $22.3 billion a year earlier – slower growth by Platinum’s standards and compared to its peers.
The Platinum International Fund has underperformed over one, three and five years to July 31, 2015. A one-year return of 21.8% to July 31, 2015 compared to 30.2% for the MSCI All Country World Net Index. Consequently, performance-fee revenue fell $25 million in FY15.
Platinum has shown it can grow funds under management and maintain management fees even during periods of underperformance. Stronger demand for global equities is expected as the Australian dollar continues to weaken against the Greenback, and as more Self-Managed Superannuation Funds realise they are badly underweight global shares.
Moreover, Platinum has scope to launch more products. Platinum Asia Investments, a Listed Investment Company, joined ASX in September after a successful Initial Public Offering. Other listed global investment products from Platinum would make sense.
Platinum’s fund inflows are improving, after a period of performance-driven outflows, and its Asia Fund is outperforming its benchmark index. If the International Fund’s performance improves, Platinum will look undervalued compared to Magellan and BT. Although it has underperformed in recent years, the Fund as a long-term record of significant outperformance.
Four of nine brokers who analyse Platinum have a buy recommendation, four a hold, and one a sell, consensus estimates show. A median price target of $7.33 suggests it is fully valued at the current $7.57.
It can do better than the consensus price target and an expected dividend yield of 5.1%, fully franked, is another attraction.
Platinum
Source: Yahoo!7 Finance 12 November 2015
3. Perpetual
After peaking at $58.48 in early April, Perpetual fell to $45.23 during this lingering share market correction. Its 12-month total return, slightly negative, is light years behind gains in Magellan, BT and Henderson. Fund outflows in the September quarter worried investors, although recent new investment mandates should stem flows.
Perpetual’s Global Share Fund has outperformed its benchmark index by 6.6% over three years to June 30, 2015.
I like Perpetual’s strategy to expand faster in private wealth management and capitalise on an expected huge intergenerational wealth transfer in the coming decades. The Perpetual Global Share Fund’s strong outperformance should eventually attract faster funds inflow, and the company’s transformation strategy has been successfully implemented.
Management has done a good job in stabilising Perpetual, but needs to quicken growth in the group’s international assets. Departures of high-profile Perpetual fund managers and outflows in Australian equities have been headwinds.
The ingredients are there to boost international assets. Strong fund performance, a well-regarded international investment team, higher expected demand for global equities, and general growth in the wealth-management industry are long-term drivers.
Six of 14 brokers who cover Perpetual rate it a buy and eight have a hold recommendation. A median price target of $46.20 suggests it is fully valued at the current price.
I expect brokers to continue upgrading their recommendation and price targets for Perpetual as its international funds under management, which seem to have reasonably conservative asset targets, grow faster than the market expects. Two months ago, only three brokers had a buy recommendation on Perpetual.
Perpetual
Source: Yahoo!7 Finance 12 November 2015
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at 10 November 2015.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
